Much of business involves promises or guarantees made by one party in favor of another – to pay for goods shipped, to repay a loan or some other commitment. This can be quite difficult when the party granting the warranty is located in Canada, where legal remedies are available. This becomes more difficult when the guarantor is located outside of Canada.
It is increasingly common for loans to be backed by guarantees from foreign parent companies or subsidiaries whose assets are located outside of Canada. A question frequently asked by lenders is “What law should govern a guarantee from a foreign guarantor?” This is an important question, which I have recently been asked in various ways by a number of lenders. And the answer is, predictably, “It depends.”
The choice of applicable law for a guarantee in a Canadian lending transaction involving foreign guarantors depends on various factors, including the strength of the guarantor, the foreign jurisdiction involved and the amount of the loan. Here are some considerations for lenders and other creditors when taking out a foreign guarantee.
What type of warranty?
When considering a guarantee from a foreign entity, lenders should consider the value of the assets of the foreign entity and whether reliance on those assets is intended to be a primary method of recovery in enforcement proceedings, or s Rather, it is a supplement to the borrower’s guarantee file. Lenders should also consider whether such security will be unlimited or limited in reliance on a particular dollar amount or a specific security such as a pledge of shares.
What law will govern the warranty?
Depending on the foreign jurisdiction and the nature of any collateral securing the collateral, the contracting parties may be able to negotiate and decide the law applicable to the loan documents. It is a well-established common law principle that courts will uphold the governing law clause of a contract, even where the contracting parties have no connection with the chosen jurisdiction, if the choice of law is in good faith, legal and not contrary to public order. In a cross-border transaction, it is often more cost effective for a lender to choose the same applicable law for the underlying loan agreement, the guarantee and any security document. Choosing the same jurisdiction to govern the loan documents generally allows for predictability and familiarity if the lender needs to initiate enforcement proceedings.
However, for the purpose of enforcing a guarantee given by a foreign entity, it may be in the interest of the lender that foreign law govern the guarantee. To enforce a warranty governed by Canadian law in a foreign jurisdiction, the court in the foreign jurisdiction must properly interpret and impose Canadian law in a foreign proceeding. This introduces the possibility of delays, unpredictable interpretations of the law, additional costs and, at worst, the possibility of the warranty being deemed unenforceable.
In the context of cross-border lending involving US entities, US courts have generally applied safeguards governed by Canadian law, absent fraud or public order concerns. However, in view of the potential risks, jurisdiction-specific guarantees are generally obtained if the likelihood of execution and the value of the guarantee securing the guarantee outweighs the cost associated with engaging foreign counsel.
In some cases where the value of the collateral is high, lenders may choose to obtain collateral governed by each of the foreign jurisdictions applicable to the guarantor, in order to maximize their collateral enforcement options.
Should I ask for an opinion?
A foreign lawyer can advise on local security requirements and advise on the enforceability of security. When acting on behalf of lenders, we also recommend obtaining the advice of foreign lawyers on the applicability of the choice of law and submission to jurisdiction clauses with respect to documents governed by Canadian law. . There are other foreign notices a lender should consider obtaining, including what is known as a “banking business notice”, which assures the lender that it will not be deemed to be carrying on banking business in local jurisdiction, and therefore subject to local regulatory requirements, as a result of the loan in question.
A final point to consider is cost – opinions from foreign law firms can be surprisingly expensive. It is important for a lender to weigh the cost of obtaining outside opinions against the value of the collateral, the strength of the borrower and the value of the loan.